Chapter 5: The Economics of Grade Retention

Illustrated in this chapter is the importance of some basic economic issues associated with grade retention. First, when thinking about the effects of retention, one must go beyond considering just the direct benefit (or lack thereof) of retention and also consider the costs to the student and to the taxpayer of the policy. Second, an economic model is outlined that portrays the retention decision as made by the parents who choose whether or not to retain the child on the basis of expected private costs and benefits. As part of this discussion, the author points out inefficiencies that arise in this model and in other possible decision models because of the result that the decision maker does not face both the full costs and benefits of retention. In order to move toward an optimal outcome with regard to retention, the incentives must be changed so that the decision maker bears both the full costs and benefits of the retention decision. Finally, from the estimation standpoint it is shown that it is important to account for unobservable characteristics of the student that affect both the decision to be retained and the outcome of interest.